Cap on mortgage Loan to Value Ratios

by Mark Johnston

It seems that there are to be tough new rules handed to the Bank of England shortly. These rules are to ban unsustainable mortgages and prevent another ‘housing bubble’.

The government believes that ‘previous light touch regulation has led to unmitigated disaster for the economy’.

These plans are believed to prevent banks and building societies from repeating the same mistakes they previously made in the run up to the credit crunch, when many of them were offering their customers mortgages worth 125% of their property’s value.

What the government is suggesting is that the Bank of England put a ‘ceiling’ on the maximum percentage of financing mortgage loans, setting ratios to burst credit bubbles before they become too big.

Therefore meaning both lenders and property developers may be barred from offering loans if borrowers only put down a small deposit.

This would mean when house prices are soaring, buyers would still be forced to put down large deposits before being approved for a mortgage. But the bank would also be able to intervene when the economy is in the ‘doldrums’, encouraging more attractive mortgage packages that require deposits of only 5% to 10%.

George Osborne, government chancellor, insisted that the new system “would provide clear lines of responsibility and help to avert future crisis”.

These proposals are part of the discussions regarding the financial services bill. The government has proposed that the chancellor should have a power of direction over the Bank of England in times of crisis and therefore within this bill there is a statutory responsibility to tell the chancellor if a crisis is ‘blowing up’ which could put public money at risk.

At the moment there is no official channel in which to raise concerns with the chancellor over threats to public funds and this represents a deeply confusing and highly dangerous hole in the power.

A new financial policy committee (FPC) would be set up at the bank and this committee would look out for dangerous linkages in the financial system and identify new instruments that might undermine stability. It would be charged with containing credit booms as well as limiting the damage of ‘credit busts’. It would be handed the power to implement changes through the financial services bill.

According to opposition critics of the new financial services bill “Chancellor George Osborne is creating a ‘dangerous, concentration of power and information in the Bank of England”.

George Osborne has however suggested that “the precise tools we give to the financial policy committee (FPC) are yet to be determined. I freely accept that we are largely in un-charted territory in policy making here or indeed anywhere in the world”.

Some experts believe that these plans will unsettle home buyers, especially first time buyers.

Karen Barrett, chief executive of financial advice website said “first time buyers in particular would be negatively affected by the move as saving fro a big enough mortgage deposit is one of the main obstacles currently preventing many from getting their foot on the first rung of the property ladder”.

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